T.C. Memo. 2014-9

UNITED STATES TAX COURT

STEVEN R. ESTES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16528-11L. Filed January 13, 2014.

Steven R. Estes, pro se.

Jonathan M. Hauck and William John Gregg, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

KERRIGAN, Judge: The petition in this case was filed in response to a

Notice of Determination Concerning Collection Action(s) under Section 6320

and/or 6330 (notice of determination) for tax years 2004, 2005, and 2006.
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[*2] Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect at all relevant times, and all Rule references are to the Tax

Court Rules of Practice and Procedure. We round all monetary amounts to the

nearest dollar.

The issues for consideration are: (1) whether petitioner’s nonemployee

compensation and wages constitute income under section 61(a); (2) whether

petitioner is liable for additions to tax under sections 6651(a)(1) and (2) and

6654(a); and (3) whether respondent’s determination to proceed with collection

actions regarding pettioner’s unpaid income tax liabilities for tax years 2004,

2005, and 2006 was proper.

FINDINGS OF FACT

Some of the facts are stipulated and are so found. We incorporate by

reference the stipulation of facts and the attached exhibits. Petitioner resided in

Maryland when he filed the petition. 

Petitioner did not file Forms 1040, U.S. Individual Income Tax Return, for

tax years 2004, 2005, and 2006. Petitioner did not have any Federal income tax

withheld from his income for tax years 2004 and 2005, but he did have $5,156

withheld from his gross income for tax year 2006. Petitioner did not make any

estimated Federal income tax payments for tax year 2004, 2005, or 2006. For each
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[*3] tax year in issue respondent prepared a substitute for return, pursuant to

section 6020(b), on petitioner’s behalf using information reported by third-party

payors.

In tax year 2004 petitioner received $49,714 in nonemployee compensation

from Pingho Associates Corp. In tax year 2005 petitioner received $25,004 and

$7,266 in nonemployee compensation from the Merge Computer Group, Inc., and

Twin Stars Systems, Inc., respectively. In tax year 2006 petitioner received

$44,550 in wages from ADECCO USA, Inc., and $4,872 in nonemployee

compensation from Twinstars Corp. 

On October 15, 2007, respondent issued petitioner two notices of

deficiency, one for tax year 2004 and the other for tax year 2005. The notice of

deficiency for tax year 2004 determined a deficiency of $13,330 and additions to

tax pursuant to sections 6651(a)(1) and (2) and 6654(a) of $2,999, $1,866, and

$387, respectively. The notice of deficiency for tax year 2005 determined a

deficiency of $7,461 and additions to tax pursuant to sections 6651(a)(1) and (2)

and 6654(a) of $1,679, $597, and $299, respectively. On January 12, 2009,

respondent issued petitioner a notice of deficiency for tax year 2006 determining a

deficiency of $7,402 and additions to tax pursuant to section 6651(a)(1) and (2) of

$505 and $213, respectively. 
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[*4] All three notices of deficiency were mailed to petitioner at an address in

Arlington, Virginia. The Arlington, Virginia, address was petitioner’s last known

address as listed in respondent’s records when the notices were mailed. All three

notices of deficiency were returned to respondent unclaimed. Petitioner did not

receive any of the notices of deficiency and did not file a petition in response to

any of these notices. 

On June 1, 2010, respondent sent petitioner a Letter 1058, Final Notice of

Intent to Levy and Notice of Your Right to a Hearing (levy notice), with respect to

his income tax liabilities for tax years 2004, 2005, and 2006. The levy notice was

mailed to petitioner’s current address in Silver Spring, Maryland. On July 23,

2010, petitioner timely filed a Form 12153, Request for a Collection Due Process

or Equivalent Hearing, regarding the proposed levy action.

On February 3, 2011, a settlement officer sent petitioner a letter scheduling

a telephone conference call for March 16, 2011. On March 16, 2011, petitioner

called the settlement officer. During the telephone conference petitioner (1)

requested a face-to-face collection due process (CDP) hearing, (2) indicated that

he wished to challenge the underlying liabilities with respect to all three years in

issue, and (3) indicated that he never received a notice of deficiency for tax years

2004, 2005, and 2006. Upon hearing petitioner’s contention that he did not
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[*5] receive any notice of deficiency, the settlement officer ended the telephone

conference in order to verify it. After verifying that the notices of deficiency had

been returned to respondent, the settlement officer called petitioner on April 6,

2011, and informed him that he could challenge the underlying liabilities and that

his case would be reassigned to a new settlement officer.

On April 26, 2011, a second settlement officer mailed a letter to petitioner

scheduling a telephone conference call for June 2, 2011. On May 9, 2011, the

settlement officer called petitioner. The settlement officer (1) indicated that he

could not approve petitioner’s request for a face-to-face CDP hearing unless

petitioner provided signed Forms 1040 for the years in issue, (2) declined

petitioner’s request to tape record the CDP hearing, and (3) indicated that

petitioner would not be permitted to challenge his underlying liabilities for tax

years 2004 through 2006 because notices of deficiency had been mailed to his last

known address. Petitioner declined to provide signed Forms 1040. 

On June 2, 2011, a telephone CDP hearing was held between the settlement

officer and petitioner. Petitioner was not allowed to challenge the underlying

liabilities for tax years 2004 through 2006 or to tape record the CDP hearing. On

June 6, 2011, the settlement officer mailed petitioner a letter containing copies of

the notices of deficiency for tax years 2004, 2005, and 2006. 
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[*6] On June 9, 2011, respondent issued petitioner a notice of determination

sustaining the proposed levy action. 

On July 13, 2011, petitioner filed a timely petition. In his petition,

petitioner raised the following issues: (1) petitioner disputed the underlying

liabilities for tax years 2004 through 2006; (2) petitioner did not receive timely

notice of the notices of deficiency for tax years 2004 through 2006; (3) respondent

was not authorized by law to prepare substitutes for returns; (4) the compensation

petitioner received for tax years 2004 through 2006 was not income; (5)

respondent did not specifically identify which provisions of the Code make

petitioner liable for Federal income tax; (6) the settlement officer did not comply

with the requirements of section 6501(c)(3) in conducting the CDP hearing; (7)

respondent did not notify petitioner of his appeal rights; and (8) petitioner was not

given an opportunity to dispute his underlying liabilities. 

On May 11, 2012, respondent filed a motion to remand this case to

respondent’s Appeals Office to hold a new CDP hearing. On June 13, 2012, we

granted respondent’s motion and ordered respondent to provide a face-to-face

CDP hearing at a reasonable and mutually agreed-upon date and time. 

On July 12, 2012, a third settlement officer mailed petitioner a letter

scheduling a telephone conference call for August 10, 2012. On July 26, 2012,
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[*7] petitioner mailed a letter to the settlement officer requesting that the CDP

hearing be held face-to-face at the Appeals Office closest to his residence. 

On August 10, 2012, a face-to-face CDP hearing was held between the

settlement officer and petitioner. The settlement officer provided petitioner copies

of the notices of deficiency and account transcripts for tax years 2004 through

2006. Petitioner indicated that he wished to challenge the underlying tax

liabilities. The settlement officer informed petitioner that he could challenge the

underlying liabilities by providing Forms 1040 for tax years 2004 through 2006. 

Petitioner declined to provide the settlement officer with any documents regarding

his underlying liabilities. 

On January 25, 2013, the settlement officer issued petitioner a supplemental

notice of determination sustaining the proposed levy action. 

OPINION

Section 6331(a) authorizes the Secretary to levy upon the property and

property rights of a taxpayer who fails to pay a tax within 10 days after a notice

and demand. Before the Secretary may levy upon the taxpayer’s property, the

Secretary must notify him or her of the Secretary’s intention to make the levy. 

Sec. 6331(d)(1). The Secretary must also notify the taxpayer of his or her right to

a CDP hearing. Sec. 6330(a)(1).
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[*8] If the taxpayer requests a CDP hearing, the hearing is conducted by the

Appeals Office. Sec. 6330(b)(1). At the hearing the taxpayer may raise any

relevant issue relating to the unpaid tax or the proposed levy. Sec. 6330(c)(2)(A). 

Once the settlement officer makes a determination, the taxpayer may appeal the

determination to this Court. Sec. 6330(d)(1). The Court has jurisdiction to review

the Commissioner’s administrative determinations. Id.

I. Standard of Review

Where the validity of the underlying tax liability is properly at issue, we

review that matter de novo. Sego v. Commissioner, 114 T.C. 604, 610 (2000);

Goza v. Commissioner, 114 T.C. 176, 182 (2000). A taxpayer may challenge the

underlying tax liability during a CDP hearing if he or she did not receive a

statutory notice of deficiency for the liability or did not otherwise have the

opportunity to dispute the liability. Sec. 6330(c)(2)(B); see also Montgomery v.

Commissioner, 122 T.C. 1, 9 (2004). The Court considers an underlying tax

liability on review only if the taxpayer properly raised the issue during the CDP

hearing. Sec. 301.6330-1(f)(2), Q&A-F5, Proced. & Admin. Regs.; see also

Giamelli v. Commissioner, 129 T.C. 107, 115 (2007).

All three notices of deficiency were mailed to petitioner at an address in

Arlington, Virginia. All three notices of deficiency were returned to respondent
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[*9] unclaimed. Because petitioner did not receive any of the notices of

deficiency, he was unable to file a petition in response to any of them with this

Court. 

Respondent has confirmed that petitioner did not receive copies of the

notices of deficiency until his CDP hearing. Thus, petitioner could properly

challenge the underlying tax liabilities at his CDP hearing. 

Respondent contends that petitioner had a prior opportunity to contest his

liabilities at the supplemental CDP hearing. During petitioner’s initial CDP

hearing petitioner indicated that he would like to challenge his underlying

liabilities for the years at issue, but he was not allowed to do so. At the

supplemental CDP hearing petitioner also indicated that he wished to challenge

the underlying tax liabilities. Respondent acknowledged in the notice of

determination that petitioner had raised issues concerning his underlying liabilities

during the CDP hearing. See Cantrell v. Commissioner, T.C. Memo. 2012-257, at

*5-*6. Since petitioner did not receive statutory notices of deficiency for tax years

2004 through 2006 and did not otherwise have the opportunity to dispute the

liabilities, we review his underlying liabilities de novo.

The Court reviews administrative determinations by the Commissioner’s

Appeals Office regarding nonliability issues for abuse of discretion. Hoyle v. 
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[*10] Commissioner, 131 T.C. 197, 200 (2008); Goza v. Commissioner, 114 T.C.

at 182. In determining abuse of discretion, we consider whether the determination

was arbitrary, capricious, or without sound basis in fact or law. See, e.g., Murphy

v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006);

Woodral v. Commissioner, 112 T.C. 19, 23 (1999). The Court does not conduct

an independent review and substitute its judgment for that of the settlement

officer. Murphy v. Commissioner, 125 T.C. at 320. Rather, if the settlement

officer follows all statutory and administrative guidelines and provides a reasoned,

balanced decision, the Court will not reweigh the equities. Link v. Commissioner,

T.C. Memo. 2013-53, at *12.

II. Petitioner’s Underlying Liabilities

Petitioner contends that the nonemployee compensation and wages he

received for tax years 2004 through 2006 do not constitute income under section

61 and that he is not liable for additions to tax under sections 6651(a)(1) and (2)

and 6654(a).

A. Unreported Income

Generally, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and the taxpayer bears the burden of proving those

determinations are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,
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[*11] 115 (1933). In order to shift the burden, the taxpayer must comply with all

substantiation and recordkeeping requirements and cooperate with all reasonable

requests by the Commissioner for witnesses, information, documents, meetings,

and interviews pursuant to section 7491(a)(2). See Higbee v. Commissioner, 116

T.C. 438, 441 (2001). Petitioner did not argue that the burden should shift, and he

failed to introduce credible evidence that respondent’s determinations are

incorrect. The burden of proof remains with petitioner.

Section 61 provides that “gross income means all income from whatever

source derived”. Section 61(a)(1) includes as income “[c]ompensation for

services, including fees, commissions, fringe benefits, and similar items”. The

Supreme Court has held consistently that gross income “was used by Congress to

exert in this field ‘the full measure of the taxing power.’” Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 429 (1955) (quoting Helvering v. Clifford, 309

U.S. 331, 334 (1940)). The individual earning the income is liable for the

payment of the income tax. See Lucas v. Earl, 281 U.S. 111, 114-115 (1930). The

taxpayer has the burden of demonstrating that his or her accession to wealth is

exempt from taxation. Commissioner v. Glenshaw Glass Co., 348 U.S. at 430. 

Petitioner, a resident of Maryland, is a taxpayer subject to Federal income

tax who is obliged to file Federal income tax returns and to pay Federal income tax
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[*12] on his income, specifically including nonemployee compensation and

wages. See secs. 1, 61(a), 6012(a), 7701(a)(1), (14); see also United States v.

Romero, 640 F.2d 1014, 1016 (9th Cir. 1981) (“Compensation for labor or

services, paid in the form of wages or salary, has been universally held by the

courts of this republic to be income, subject to the income tax laws currently

applicable.”). 

At trial respondent provided a number of Forms 1099-MISC, Miscellaneous

Income, a Form W-2, Wage and Tax Statement, and other documentation that

indicated that petitioner had received nonemployee compensation and wages for

tax years 2004 through 2006. Petitioner stipulated that he received nonemployee

compensation and wages for tax years 2004 through 2006 in the amounts shown

on the Forms 1099-MISC and Form W-2, and he did not provide any evidence to

suggest that the amounts of income he received were different from the amounts

stated in the notices of deficiency. We find that petitioner’s nonemployee

compensation and wages constitute income under section 61(a), and we sustain

respondent’s determinations.

B. Addition to Tax

Under section 7491(c) the Commissioner has the burden of producing

evidence with respect to a taxpayer’s liability for any addition to tax. See Higbee
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[*13] v. Commissioner, 116 T.C. at 446-447. To meet this burden of production,

the Commissioner must come forward with sufficient evidence that it is

appropriate to impose the addition to tax. Id. Once the Commissioner meets this

burden, the taxpayer must come forward with evidence sufficient to persuade this

Court that the determination is incorrect. Id.

Respondent determined that petitioner is liable under section 6651(a)(1) for

an addition to tax for failure to timely file a return for each year in issue. Section

6651(a)(1) authorizes the imposition of an addition to tax for failure to timely file

a return, unless it is shown that such failure is due to reasonable cause and not due

to willful neglect. A failure to file a timely Federal income tax return is due to

reasonable cause if the taxpayer exercised ordinary business care and prudence but

nevertheless was unable to file the return within the prescribed time. See sec.

301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect means a conscious,

intentional failure to file or reckless indifference toward filing. United States v.

Boyle, 469 U.S. 241, 245 (1985). 

Respondent met the burden of production by introducing evidence that

petitioner did not file timely returns for the years in issue. Petitioner did not

introduce any evidence to explain his failure to do so. Consequently, we sustain

respondent’s determinations as to the section 6651(a)(1) addition to tax. 
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[*14] Respondent also determined that petitioner is liable under section

6651(a)(2) for additions to tax for failure to timely pay tax shown on a return for

each year in issue. Section 6651(a)(2) imposes an addition to tax for failure to pay

the amount of tax shown on a taxpayer’s Federal income tax return on or before

the payment due date unless such failure is due to reasonable cause and not due to

willful neglect. The section 6651(a)(2) addition to tax applies only when an

amount of tax is shown on a return filed by the taxpayer or prepared by the

Secretary. Sec. 6651(a)(2), (g)(2); Cabirac v. Commissioner, 120 T.C. 163, 170

(2003). When a taxpayer has not filed a return, the section 6651(a)(2) addition to

tax may not be imposed unless the Secretary has prepared a substitute for return

that satisfies the requirements of section 6020(b). See Wheeler v. Commissioner,

127 T.C. 200, 210 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008).

Respondent met the burden of production by producing evidence that

respondent prepared a substitute for return for petitioner for each year in issue,

each showed tax due, and petitioner did not pay the amount of tax due by the

payment due date. Petitioner did not file a Federal income tax return for any of the

years in issue. However, respondent prepared a substitute for return on 

petitioner’s behalf for each of the three years in issue. The substitutes for returns

satisfy the requirements of section 6020(b). For each year in issue the substitute
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[*15] for return respondent filed on petitioner’s behalf showed tax due. Petitioner

did not have any Federal income tax withheld from his income for tax years 2004

and 2005. Petitioner was given credit for the $5,156 withheld from his gross

income for tax year 2006; however, the tax return for tax year 2006 showed

additional tax due. Petitioner did not make any estimated Federal income tax

payments for tax year 2004, 2005, or 2006. Consequently, we sustain

respondent’s determinations as to the section 6651(a)(2) additions to tax.

Respondent also determined that petitioner is liable for additions to tax for

failure to pay estimated tax under section 6654 for tax years 2004 and 2005. 

Section 6654(a) imposes an addition to tax on a taxpayer who underpays his or her

estimated tax. The addition to tax is calculated with reference to four required

installment payments of the taxpayer’s estimated tax liability. Sec. 6654(c) and

(d). Each required installment of estimated tax is equal to 25% of the “required

annual payment”. Sec. 6654(d). The required annual payment is equal to the

lesser of (1) 90% of the tax shown on the individual’s tax return for that year (or,

if no tax return is filed, 90% of his or her tax for such year), or (2) if the individual

filed a tax return for the immediately preceding taxable year, 100% of the tax

shown on that tax return. Sec. 6654(d)(1)(A)-(C). A taxpayer has an obligation to

pay estimated tax only if he or she has a required annual payment. Wheeler v.
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[*16] Commissioner, 127 T.C. at 212; see also Mendes v. Commissioner, 121 T.C.

308, 324 (2003).

To meet the burden of production with regard to the section 6654(a)

addition to tax, respondent must, at a minimum, produce evidence necessary to

enable the Court to conclude that petitioner had required annual payments for

2004 and 2005. See Wheeler v. Commissioner, 127 T.C. at 211. Although

petitioner did not file tax returns for the years in issue, respondent provided copies

of substitutes for returns prepared on petitioner’s behalf for tax years 2004 and

2005. Both substitutes for returns showed tax due. Petitioner admits that he has

not filed his tax returns for over a decade, that he did not have sufficient Federal

income tax withheld by his employers for tax year 2004 or 2005, and that he made

no estimated tax payments for tax years 2004 and 2005. Respondent has met the

burden of production, establishing that petitioner was required to make estimated

tax payments for tax years 2004 and 2005 but failed to do so. Petitioner does not

qualify for any of the exceptions listed in section 6654(e). Consequently, we

sustain respondent’s determinations as to the section 6654(a) additions to tax.

III. The Nonliability Determinations

Following a CDP hearing the settlement officer must determine whether to

sustain the collection action, in this case the imposition of a levy. In making that
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[*17] determination, section 6330(c)(3) provides that the settlement officer must

consider: (1) whether the requirements of any applicable law or administrative

procedure have been met; (2) any issues appropriately raised by the taxpayer; and

(3) whether the proposed levy action balances the need for the efficient collection

of taxes and the legitimate concern of the taxpayer that any collection action be no

more intrusive than necessary. Lunsford v. Commissioner, 117 T.C. 183, 184

(2001); Diamond v. Commissioner, T.C. Memo. 2012-90, slip op. at 6-7. 

We note that the settlement officer properly based his determination on the

required factors. The settlement officer (1) verified that all legal and procedural

requirements had been met, (2) considered the issues petitioner raised, and (3)

determined that the proposed collection action appropriately balanced the need for

the efficient collection of tax with the legitimate concern of petitioner that the

collection action be no more intrusive than necessary.

Petitioner contends that he is entitled to only one CDP hearing for a given

tax period and that the supplemental CDP hearing constituted an invalid second

CDP hearing for tax years 2004, 2005, and 2006. Petitioner is essentially

contending that we can review only the determination from the CDP hearing that

gave rise to the petition in this case and that we committed error when we

remanded this case for a supplemental CDP hearing. It is well settled that a 
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[*18] taxpayer is entitled to a single hearing under section 6330 with respect to the

year to which the unpaid liability relates. Sec. 6330(b)(2); Kelby v.

Commissioner, 130 T.C. 79, 86 (2008); Freije v. Commissioner, 125 T.C. 14, 22

(2005). However, when the Court remands a case to Appeals, the further hearing

is a supplement to the taxpayer’s original section 6330 hearing, not a new hearing. 

Kelby v. Commissioner, 130 T.C. at 86. The supplemental CDP hearing allows

the parties to complete the initial section 6630 hearing while preserving the

taxpayer’s right to receive judicial review of the ultimate administrative

determination. Id. We find that petitioner was provided only one CDP hearing for

each of tax years 2004, 2005, and 2006.

Petitioner contends that respondent did not provide him with any admissible

evidence to support the determination or with any statutory provisions that make

him liable for a tax. Section 6330(c)(1) does not require the Appeals officer to

rely on any particular document in satisfying the verification requirement and does

not require that the Appeals officer actually give the taxpayer a copy of the

documents upon which he or she relied. Craig v. Commissioner, 119 T.C. 252,

262 (2002); Nestor v. Commissioner, 118 T.C. 162, 166 (2002). The settlement

officer provided petitioner with a copy of a Form 4340, Certificate of

Assessments, Payments, and Other Specified Matters, and a computer transcript
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[*19] for each tax year in issue. A Form 4340 constitutes presumptive evidence

that a tax has been validly assessed pursuant to section 6203. Davis v.

Commissioner, 115 T.C. 35, 40 (2000). We have held specifically that it is not an

abuse of discretion for an Appeals officer to rely on a Form 4340, Nestor v.

Commissioner, 118 T.C. at 166; Davis v. Commissioner, 115 T.C. at 41, or a

computer transcript of account, Schroeder v. Commissioner, T.C. Memo. 2002-

190; Mann v. Commissioner, T.C. Memo. 2002-48, to comply with section

6330(c)(1). We find that the settlement officer provided petitioner with evidence

of the determination. 

Petitioner contends that the substitutes for returns respondent prepared on

his behalf are not valid tax returns. Under section 6020(b)(1), the Secretary has

the authority to execute a tax return “[i]f any person fails to make any return

required by any internal revenue law or regulation made thereunder at the time

prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return”. 

Section 6020(b)(2) provides that “[a]ny return so made and subscribed by the

Secretary shall be prima facie good and sufficient for all legal purposes.” The

Secretary is authorized to determine a deficiency even when the taxpayer does not

file a tax return. Hartman v. Commissioner, 65 T.C. 542, 546 (1975); sec.
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[*20] 301.6211-1(a), Proced. & Admin. Regs. We find that the substitutes for

returns were valid tax returns.

We find that the settlement officer did not abuse his discretion in upholding

the proposed collection action. Any contention we have not addressed is

irrelevant, moot, or meritless. 

To reflect the forgoing, 

Decision will be entered

for respondent.